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Dollar Falls Like A Rock After Fed Meeting…

* Fed hikes, but disappoints
* Currencies and metals skyrocket
* CPI remains steady
* New Zealand GDP

And now. Today’s A Pfennig For Your Thoughts

Good Day and welcome to Thursday morning. The market action following the Fed meeting was fairly strong as the dollar index was down about 1% once the dust had settled. While the March Fed meeting is now behind us and the next one isn’t until the beginning of May, we still have to deal with Fed member speeches/commentary along the way and the markets trying to interpret economic data against the backdrop of the next rate hike. As is customary, let’s see where Frank’s adventures take us today.

Cafayate – As we hit the pavement just north of San Carlos, the people in my Hilux cheered. We had been on a gravel portion of Argentina’s National Route 40 (Ruta 40) for about 120 kilometers and the gang was ready for a little pavement. NR40 runs a little over 5,000 kilometers north to south in the afternoon shadow of the Andes. A good portion is paved but the crony politics of prior governments have resulted in many cases where the funds allocated to the project don’t make where the rubber meets the road. That’s certainly one way to run up a national debt and not get much for it.

It’s interesting that at least in my world over the past 35 years, there has been a lot of focus and discussion about the US fiscal deficit and total national debt. Looking back to the beginning of the 1960’s, we see a slow but steady growth in fiscal deficits creating a slightly larger outstanding until we get to the 1980’s. And it is there that things take off. While we all know that the last eight years have seen the largest growth measured in dollars without any adjustment for inflation etc, looking at how much the outstanding national debt grew as a multiple of where each administration stood upon arrival seems like a better measure. With that in mind the largest increase – a 1.8 x pop came under Regan from January 1981 to January 1989. All the rest stand well in the shadow of this increase – Bush II at 0.9x, Obama at 0.8x, Bush I at 0.5 x and with some actual reduction in outstanding Clinton manages to take the blue ribbon at 0.4 x (according to Federal Reserve Data).

Again, while this has been a large portion of discussion in my circle of friends, it appears to be slipping off the dinner topic list in Washington right now. So where does this take us if current trends continue. Do we shuffle slowly to a Japan level of debt – around 230% of GDP compared to the US at about 110%? Do we open the floodgates and arrive there more quickly? Do the fiscal hawks win the day and manage the levels down. While relative debt levels are important for future currency price changes, will a large expansion in US borrowing put pressure on the US dollar? Back to more current talk of rate hikes and market movements from Mike and Dane. . . .

Thanks again Frank and I appreciate the segue. As I mentioned up top, the dollar bulls were left disappointed upon conclusion of the Fed meeting and it was one of those situations which had diametric components. The decision to raise the interest rate was, in of itself, a hawkish action but the associated outlook, forecasts, and commentary did not live up to increased expectations and was widely interpreted as being dovish. In my opinion, I think the markets out ran their coverage and got ahead of themselves with these thoughts about an upgraded rate path. Today’s media, market, and trading mentality reminds me of a dead fir tree where just one spark causes an immediate and irreversible reaction whether or not the intention was total/complete consumption.

Anyway, the vote was 9-1 to hike rates by 0.25%. The statements following the meeting were largely unchanged and there was no sign or indication of a desire to accelerate the current path of gradual tightening. Perhaps the most impactful aspect of the meeting was the unchanged dot plot chart, which illustrated Fed members continue to expect 2 more rate hikes this year and 3 more in 2018. The markets were hoping to see, at the very least, the 2018 path upgraded to 4 moves and possibly a hawkish surprise development with an addition to this year’s expectation, but that just wasn’t in the cards.

Economic growth projections remained steady at 2.1%, the unemployment rate is still expected to finish the year at 4.5%, and year-end core inflation expectations ticked a bit higher to 1.9% from 1.8%. While it was acknowledged that inflation is getting closer to the 2% target, they indicated this target is symmetric and was interpreted to mean the Fed is willing to let inflation run a little higher before they start to get concerned. Along those lines, I saw something where economists think interest rates need to be at least 2% before any tapering would occur. To sum it all up, there was an overall sense of disappointment even though the Fed did hike rates, market experts are looking at June and December as the next likely moves, and the Fed pretty much feels the same about everything as they did back in December.

And now, let’s shine the spotlight on Dane Moody and get his market analysis.

The markets broke out of their ranges on Wednesday afternoon, thanks to the Federal Reserve’s statement. Traders spent the seconds, minutes and hours after the Fed’s announcement and Yellen’s press conference unwinding the “strong dollar” positions they had accumulated over the last week or so. The markets expected Fed members to sound more hawkish about additional hikes in 2017 and 2018, but as Mike mentioned above, Yellen and Co. intend on staying the course through the end of next year.

The moves in currencies and metals were swift and fairly substantial. Traders drove almost every currency up on the day, with many currencies strengthening by over 1%. Gold finished Wednesday adding 20 bucks for the day, and silver advanced by 46 cents, a 2.73% rise. The 10 year treasury yield fell off a cliff immediately following the published announcement, eventually settling at 2.5003. The US dollar index was down over 1% and is starting to get close to dropping below the 100 figure, which it has held since early February.

The euro and Swiss franc added to their gains on the day as exit polls from the Netherlands indicated that Prime Minister Mark Rutte’s party won the most seats in parliamentary elections. The euro hit a 5 week high, and the Swiss franc moved right up against parity, a 4 week peak.

It’s always interesting on days like Wednesday to note how US dollar news drives the currency market. In Tuesday’s Pfennig, I mentioned how the impending “official announcement” of Brexit was weighing on the GBP, and it sold off by over 0.7%. However, all of those losses were reversed in mere minutes on Wednesday in the wake of the Fed announcement. This won’t be any surprise to long-time Pfennig readers and to those versed in currency markets, but it is a good reminder on how that inverse relationship between many currencies and the US dollar works. When the dollar is strong, it takes no prisoners, regardless of the underlying fundamentals here or in the other currencies. However, on days like yesterday, the opposite can be true.

Overshadowed in all of rate decision excitement was the release of February’s CPI data. Year-on-year CPI readings were up by 2.7%, which was bang on the expected reading. However, the month-on-month move was very small, advancing only 0.1%. Inflation targets and expectations were certainly a hot topic for Yellen’s comments yesterday afternoon, and while the numbers are rising compared to last year, the short-term rise is very gradual, a sentiment she certainly expressed during her statement.

This morning, probably about the time this hits your inbox, we get the weekly jobless claims for the first full week of March. Consensus is another drop in last week’s numbers, with expectations set at 240k.

Thanks Dane and well said. As I came in this morning, most of the currencies have held a good portion of their gains from yesterday and precious metals have actually continued to climb a bit higher. The currencies from down under, Aussie and Kiwi, aren’t as fortunate. The Australian dollar is down about 0.30% after their February jobs report disappointed and the New Zealand dollar is down about 0.75% since fourth quarter GDP missed its mark. In addition to the Fed, we had central bank meetings in Switzerland, Norway, Japan, and England all leave policy unchanged as was expected.

That does it for today. So, with that said, have a great day.

Currencies today 3/16/17.. American Style: A$ .7689, kiwi .6994, C$ .7513, euro 1.0725, sterling 1.2330, Swiss $1.0025, .European Style: rand 12.7704, krone 8.5338, SEK 8.8638, forint 289.00, zloty 4.0166, koruna 25.188, RUB 58.0757, yen 113.43, sing 1.4023, HKD 7.7639, INR 65.39, China 6.8862, peso 19.2217, BRL 3.1147, Dollar Index 100.60, Oil $49.28, 10-year 2.52%, Silver $17.50, Platinum $961.25, Palladium $768.50, Gold $1,227.75

Mike Meyer
Vice President
EverBank World Markets

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